Draghi's Guidance Change Comes at Awkward Time as Threats Emerge

9 marzo 2018 - 01.06

(Bloomberg) -- Mario Draghi picked a strange moment to change his signals on bond buying after a tumultuous few weeks for the global economy.

The European Central Bank president’s decision to drop a pledge to increase quantitative easing if needed shows confidence in the durability of euro-area growth. But it’s an unexpected gamble when U.S. President Donald Trump is threatening to start a trade war and indicators show the region’s expansion is coming off the boil. Draghi’s shift nevertheless acknowledges that the ECB’s emergency stimulus will have to end in the not-so-distant future.

“It’s certainly a surprise,” said Oliver Rakau, an economist at Oxford Economics in Frankfurt. But Draghi’s remarks are also “an attempt not to get too carried away with risks and take a very tiny step on the road to normality.”

Euro-area officials familiar with the matter said that the ECB’s internal staff calculations assume asset purchases totaling 30 billion euros ($37 billion) in the fourth quarter. Though a final decision hasn’t been made, ECB policy makers broadly agree that QE should come to an end this year, the people said.

At Thursday’s meeting, policy makers unanimously decided to change their guidance, though they kept an option to extend the program further after September, when bond buying is currently scheduled to expire. Draghi said the move was “backward-looking” because the line on possible increases had first been introduced in 2016 when the deflation threat was real.

Markets interpreted the message as dovish as Draghi elaborated on the risks to the outlook in his press conference. The euro jumped more than half a cent after the policy decision, but then fell 0.8 percent.

A notable hawkish spin has emerged at multiple central banks in recent months. Bank of England policy makers say they may need to raise interest rates faster than previously anticipated and new Federal Reserve Chairman Jerome Powell has talked up the economy so much that there’s speculation of as many as four U.S. hikes this year.

The ECB’s shift shows that it’s preparing to rein in the assistance for growth. In new forecasts, the bank kept the outlook for expansion largely unchanged for the next three years. It expects inflation to pick up to an average of 1.7 percent in 2020, which still undershoots the target of just below 2 percent.

One possible reason for Draghi’s move was a desire to soothe dissatisfaction among some Governing Council members that the ECB was behind the curve in adapting its policy language to the euro area’s strong economic growth. Economists largely predicted no change in guidance this month, expecting instead to have to wait until June to receive a clearer indication.

Nearing End

“We thought it wouldn’t happen this time,” said Sarah Hewin, an economist at Standard Chartered in London. “But it does mark that they see the path to ending QE intact.”

Thursday’s move is all the more remarkable because the ECB has a track record of trying to tighten policy too early. Draghi’s predecessor, Jean-Claude Trichet, attempted to lift interest rates in 2011 but the bank quickly had to reverse course as the economy fell into recession.

The talk of trade wars, the possibility of political instability in Italy after an inconclusive election, weaker readings in euro-area purchasing managers indexes last month and a drop in Germany’s influential Ifo confidence indicator seemed to augur against new language. Draghi nevertheless charged ahead.

“If you’re sitting there waiting for the coast to be completely clear then you can be sitting there for a long time,” said Marchel Alexandrovich, senior European economist at Jefferies International in London. “You might never get an opportunity to normalize policy.”